Thursday, December 29, 2011

Bill Henderson on the Law School Bubble

Indiana University law professor Bill Henderson, who for several years has been at the forefront of efforts to get law schools to consider the extent to which the return on investment for getting a JD does or does not justify the ever-increasing cost of doing so, has co-authored, with Rachel Zahorsky, a new article in the ABA Journal. The focus of his piece is on the symbiotic relationship that now exists between direct federal educational loans and law school operating budgets. Much of what he says will not be news to regular readers of this blog, but it's important to remember the extent to which many readers of a publication such as the ABA Journal are only vaguely aware of the scope of the financial crisis now enveloping the 44,000+ graduates pumped out by ABA schools every year.

Henderson points out that the long-term trends in the cost of legal education and the value of law degrees we have witnessed over the past generation are not mutually sustainable, citing the economist Herbert Stein's aphorism that "if something cannot go on forever, it won't." Both the logic of this position and the facts justifying it would seem unassailable, but it remains the case that a remarkable number of people in legal academia continue to treat our role in all this as if we have no actual role in all this. Consider this quote from a law school dean:

Mark Grunewald, interim dean of the law school at Washington and Lee University, thinks any blanket restrictions on federal student lending would be disastrous and unfair. “There are real differences among prospective law students’ economic circumstances, and new blanket restrictions on lending could hurt those most in need of financial support,” he says. “It’s also unclear what the legal employment market might look like after a general economic recovery. Market forces may ultimately prove to be a better corrective.”

This quote understandably exasperates Matt Leichter, author of the awe-inspiring Law School Tuition Bubble blog, who points out that in just the past seven years Washington and Lee's tuition has risen 35% faster than inflation. (On the other hand over the same time period my law school's resident tuition has risen by a tidy 133.45% over inflation, which by comparison makes W&L look like a model of fiscal restraint. The great thing about the law school racket is that it's almost always possible to find somebody who makes your own behavior look positively admirable by comparison).

Dean Grunewald's appeal to "market forces" is, under the circumstances, particularly chutzpahesque, give that his institution would have to either cut its prices drastically or go out of business if it were subjected to the dual market discipline of being forced to:

(1) Extract roughly half of its operating income from private student loans dischargeable in bankruptcy and not guaranteed by the government; and

(2) Reveal in sufficiently explicit detail exactly what happens to graduates of his law school one and two and five years (etc.) after graduation.

Grunewald, like so many legal administrators, talks about the cost of legal education as if it were a product of the laws of thermodynamics rather than the laws of what in a more enlightened era was called "political economy." As Leichter emphasizes there is absolutely no reason why Washington and Lee, like the vast majority of law schools couldn't provide a much cheaper legal education than it does now with little or no discernible loss of quality. After all, average law school tuition 25 years ago was literally a third of what it is today in constant dollars if you exclude all state subsidized tuition from the analysis. In 1985 private law school tuition and non-resident public law school tuition averaged about $13,500 a year in 2010 dollars (if you included resident tuition, then and now, this comparison would make current tuition levels look much worse, as public law school resident tuition was $3,600 in 1985, compared to about $18,500 today. Again all of this is in inflation-adjusted dollars).

In other words, providing legal education at a reasonable cost doesn't exactly require some sort of technological or cultural breakthrough. Law schools charge absurdly uneconomical -- from the perspective of their marks students -- prices because they can get away with it, period. And they can get away with it for two reasons: because they hide the ball in regard to employment and salary outcomes for their graduates, and because the federal government quite literally pays them to behave in this way. As Henderson points out this is a situation that, from the self-interested perspective of legal academics and especially legal administrators, is too good to last, so it won't.

I do want to mention one aspect of Henderson's argument that's phrased in an unfortunate fashion. Henderson points out that many recent graduates have $150,000 or more in law school debt, and then makes the following calculation:

According to NALP, the association for legal career professionals, the median starting salary for a lawyer who graduated from law school in 2010 is $63,000. For a recent, unmarried law school graduate making $63,000 and getting single-digit-percent annual pay increases, the chasm between income and prospective repayment is impractical for both the student and the government.

This combination of high debt and moderate income makes this all-too-typical law graduate eligible for the federal government’s income-based repayment program. According to FinAid’s IBR calculator, used by many law school financial aid counselors, the student will make monthly payments of $584 the first year and $1,605 in year 25. After 25 years, the loan is forgiven. At that time, more than half of the principal, $76,000, will not have been repaid, along with $26,000 in capitalized interest.

The government write-down for this student is about $103,000, which may be offset by an eventual tax payment: Under the current Internal Revenue Code, the law school grad would have $103,000 in imputed income for the debt forgiveness. Of course, the government would have to collect it from someone near enough to retirement to be eligible for membership in AARP.

I can understand that Henderson wants to use conservative estimates, if for no other reason than to avoid charges of alarmism from his head-in-the-sand colleagues. But to a general audience, even a general audience of ABA Journal readers, this analysis gives a wildly optimistic picture of the present situation for law school graduates. As Henderson is well aware, that $63,000 median starting salary for the average 2010 law school graduate is a completely fictitious figure. It's based on the approximately 40% of graduates for whom a salary was reported. How many of the 60% of the class for whom a salary was not reported had a salary of $63,000 or higher? Given the enormously strong incentives law schools have to discover and report the salaries of any and all of their graduates who have decent jobs, the answer is surely "almost none." This suggests that hardly more than one in five graduates in the 2010 class had a salary of $63,000, and that the true median is far lower.

A $63,000 job with $98,000 of law school debt (this was the average law school debt for the class of 2010) is not a good outcome by most definitions of what counts as economic well being among the professional classes, but it isn't a catastrophe either, especially given the overall state of the economy. (Note that $63,000 is 23% more than the median household income in America and just about exactly double the median income of white males of working age). Those are the sorts of figures that cause middle-aged lawyers and politicians to furrow their brows, then murmur platitudes about how things were tough in 1982 as well. But as Henderson knows, 2010 law school graduates in such circumstances are in fact far better off than the large majority of their co-graduates. The members of the latter group are in circumstances which would, if more widely known, elicit something more than furrowed brows from the people who keep voting to let the federal government unknowingly encourage new classes of law graduates to bury themselves in life-wrecking mountains of debt.

That quibble aside, this is a valuable article which I hope reaches a wide audience.

52 comments:

As Professor Henderson states in that article, due to IBR the government will soon have all the data it needs to intelligently assess its student loan programs. To go into the IBR payment program, you have to submit proof of your low earnings every twelve months. If you do not submit such proof they will kick you out of the program and you will return to the high standard repayment plan. This data gives the federal government all it needs to perform detailed and accurate analysis on the value of educational loans - program by program - school by school.

Give it five years, ten max, and the problem will take care of itself. For all the criticism it received, IBR was ironically the solution we were all hoping for.

Graduating law students and recent law grads--as well as many workers in general--are doing very poorly in today's economy. I work in a legal services agency and it is appalling to see the number of recent grads asking to volunteer to work at my agency so they can have some legal experience on their resume--unfortunately, some of whom have no political commitment to the work.

Although I appreciate what LawProf is trying to accomplish here, I must admit that many of the commenters remind me why I hated the vast majority of my law school class. I suspect many of them would be quite oblivious to the economic struggles of other workers if only they got that 160K job--even if said job involved screwing workers far worse off than recent law grads.

I'm sorry that the recently duped don't all come to your legal services agency in a size, shape, color and political orientation pleasing to you.

Meanwhile, you have a Real Law Job and many of the frequent posters don't and never have. Most of us have gotten over who we were or pretended to be in law school, and you might consider doing the same.

"Grunewald, like so many legal administrators, talks about the cost of legal education as if it were a product of the laws of thermodynamics rather than the laws of what in a more enlightened era was called "political economy."

How convenient. The administrators choose to ignore reality, because that is easier than taking responsibility for their role in this mess. Also, Henderson should have enough sense to realize that paying back $98K - or $130K - in non-dischargeable debt, on a $63K annual salary is bad for the debtor. Even FindAid.org notes that one's expected starting salary should exceed his total accumulated student debt.

For those in the slow lane, this means that a person who owes $63K in student loan debt should earn more than $63K per year. Plus, as Henderson has noted before, relatively few people earn the supposed median or average starting salaries published by NALP or the law schools, i.e. a relative few JDs earn $160K while many earn between $35K-$55K.

What Professor Henderson says could be applied to almost all post-secondary schooling. People are incurring six-figure debts for their bachelor's degrees in areas like sociology and film studies. Then they get jobs--well, some of them get jobs, anyway--making 10-20 dollars an hour, with no benefits.

Hopefully, the next generation of would-be students is learning something from their struggles and won't be duped by some prof telling them that they are special and going to grad school will anoint them.

I think what D. Furiosa says is more important than many people might realize.

There is too much focus on the evil "law schools" part in the overall mess of higher education costs and the easy access to loans.

99% of the people in this country, when they hear about a lawyer, law student, or law school graduate, just assume that the current or future JD "has it made" and tunes out any complaining about debt or hard times.

Law is seen as an elite "profession" and will continue to be seen that way for a long, long time. If serious loan reform is to occur, it will have to be system wide because nobody cares enough about struggling law grads except the struggling law grads themselves (for the most part, anyway).

The reason law schools *are* evil, is that you don't see social worker programs publishing fraudulent statistics claiming 99% placement into jobs with a median salary of $100,000.

Another reason law schools *are* evil, is that they are mental illness factories. 4% of 0Ls are depressed; 40% of 3Ls are depressed, 17% of graduates are depressed two years after finishing law school.

Yes, there are lots of other programs that cost a lot of money and do not place their graduates into good jobs - but they never promised that they would, and they don't cause their students to become mentally ill.

What's more likely, that in 5 years the government will suddenly decide to stop guaranteeing federal loans and make them dischargable in bankruptcy, forcing the closure of dozens of law schools, or

In 5 years, the federal government realizes they're going to take a huge loss on IBR, and pushes that cost back onto the students by eliminating the program without doing anything to cut off the supply of funds to academics and universities who represent actual consistencies with members who vote and donate?

I agree wit 9:03. I am sick and tired of deadbeats asking for a bankruptcy discharge. You borrowed the money, you purchased the education, PAY IT BACK you scumbag. If you feel ripped off then sue your school, but pay your creditor back as they had no part in the alleged fraud.

#3a - Lenders who loan money to students because of little risk and laws that provide advantages to creditors, including bankruptcy discharge. I doubt the lenders did any research into whether the student would have the means to pay it back.

#3a should feel the pain big time. But I'm sure someone will bail them out.

Suckling at the teat of government guarantees, and relying on the absence of bankruptcy discharge - authority for changing such laws is vested in Congress as you no doubt know - does not make the lenders blameless. Rather, it makes them reliant on an immoral status quo. They are getting a free ride, and it's a free ride that is destroying the lives of millions of our citizens.

There is plenty of blame to go around. But if you're interested, here's the proper order: Government, Lenders, Schools, Students.

I have to go with Bored3L-- IBR will not remain untouched, especially since there will be public sympathy for the plight of new lawyers.

IBR will continue to be tinkered with, if not completely disposed of, before student loans become dischargeable. Right now it's just window dressing to prevent a massive wave of defaults. It's the exact same thing as HAMP etc.--

In my mind, it's a big, big gamble on the political status quo. It may be a bigger gamble than going to law school.

Lawprof, just gave to dispute one point: in this post you make it sound like private loans are dischargeable in Bankruptcy. They're not, as long as the "loan program" that created the loan is "funded in whole or in part by a non-profit institution." See 11 USC S. 543(A)(8)(a)(i). Almost all private student loans are guaranteed by a non-profit group, which, according to current case law, makes them as non-dischargeable as government student loans. I know this because the law firm I work for represents these "non-profits" in collection matters, so I'm faced with the devastation wrought by student loans nearly every day. In fact, I guess I'm partly responsible for it, which is another sad truth I'm faced with nearly every day...

11:54: I believe you're working with private educational loans taken out prior to the 2010 federal reorganization of student lending. Those loans were not dischargeable. My understanding is that any private educational loans subsequent to the 2010 statute are dischargeable and are no longer guaranteed by the government. The effect of this has been to limit almost all new higher education lending to direct government loans.

Would one of those "non-profits" happen to be Access Group headed by New York Law School's own Richard Matasar?

Matasar likes to deflect criticism of Access Group by telling the uninformed that it is merely a "non-profit." If 11 USC reads as you suggest, this is a cynical diversion from his black hearted, immoral enterprise.

Matasar is a pathological liar and con man and was exposed by the NY Times. He tries to deflect these criticisms by saying that he "bravely" warned of a looming crisis in legal education. Sorry, Matasar, a few throwaway CYA words and an article in a TTTT Law Review don't innoculate you from criticism.

Unbelievably, the Association of American Law School's (AALS) is giving Matasr a soapbox next week at its annual conference to wax on "The Finacing and Organizing of Law Schools of the Future."

AALS should be embarrased and ashamed. Matasar is a discredited charlatan abd should be shunned. Instead, this ethically challenged soul is being invited to share is "best practices" of deceit, sleight of hand, and "cooking the books."

Whoops. 11:54 here. I posted the wrong citation, it's 11 USC S. 523(a)(8)(A)(i). Guess my memory's not as photographic as I thought. LawProf, that's a good point. My understanding is that the "direct lending" in the 2010 statute refers only to government loans; private loans guaranteed by "non-profits" are unaffected. I could be wrong about that though. As for the student loan collection process, my side is the legal/attorney side, so in a way it's not much different from other lawsuits. Except that default judgments are extremely common, probably 80-90% of the suits we file are never repsonded to by the debtors. Then it's a matter of finding out what assets the debtor has to satisfy the judgment (usually none unless there's a co-signer) and how much they can pay in monthly payments (usually very little). Then try to work out an agreement with the non-profit and the debtor on monthly payments until the judgment is paid in full. I hate doing it, but since I'm 6 years out of law school with $120k in debt like everyone else, part of me is happy to just have a job. The other part feels like a Jewish person in 1930s Germany helping hunt his own people in exchange for my own life. The non-profits we represent are like AccessGroup, but not exactly the same organization. Very similar though.

3:23,Most people who default on their student loan debts are not thieves. Sure, some people we go after are true deadbeats who just don't care. Those are the tiny minority. Most people who default on their student loans want to pay but legitimately can't, at least not the full monthly payment.

I used to believe that in ten years (which can pass in the blink of an eye), tuition will go from its current level of $45,000 to $73,000; the number of law schools would go from 200 to about 220 and the "% of law grads getting real lawyer jobs" would go from its current 50% rate to about 25-30%.

In other words I assumed that we were far from that critical point.

But now I wonder.

Could we see some of the really notorious low ranked school (e.g. that one that rhymes with stooley) have trouble filling all their seats this year? That would be such an incredible development if true.

I believe there are 80,000 applicants and approximately 55,000 seats. Now, not all applicants will eventually attend, but most will.

I have given a lot of thought as to how the law school business model collapses. Political intervention is extremely unlikely. Congress is not going to do anything about this because it's a relatively small group of people who are being victimized. Even more, from a P.R. perspective, the victims are not very sympathetic.

I believe the law schools will continue to expand seats and raise tuition as long as they are able. The current model will crash when the number of seats exceeds the number of students. I would guess that's probably around 65,000 or so. We've still got a few years before this happens.

I check lawschoolnumbers.com frequently. The fourth tier schools are now admitting people with LSAT's in the mid 140's and GPA's hovering at or below 3.0. I predict that eventually fourth tier schools will begin admitting individuals with LSAT's as low as 140.

Here are some examples from LAST YEAR (there isn't a lot of data yet this year):

I remember in the old days, on lawschooldiscussion you would see these 140 LSAT types crying about how they got rejected from every school and that their dream of being a lawyer would never come true. I guess now they're getting seats!

Getting seats, yes. However, their dream of becoming a lawyer will still never come true. Unfortunately, instead of learning this through the admissions process, they now learn after the law schools extract $100,000 in loans from them.